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4 Years on and 20 000 points later

Almost this time four years ago, the JSE All Share index trundled down to 7361. It was a low point for wary investors. While pessimism reined, optimism should have been the order of the day. As Buffett says, when hamburgers are cheap he wants to be buying not sell. Isn’t hindsight just perfect though?

How many investors loaded up, knowing that the subsequent 4 years would produce 20 000 points over the 7300 level. The annual capital growth alone has been around 39% per annum.

Baron Rothschild, the banking mogul is reportedly said to have advised that the best time to buy is when there is “blood in the streets.”. It’s simply that at these times value presents itself.

Buying good value, provides that necessary cushion. It’s what some fund managers call the margin of safety. Having that cushion puts the investors on a front footing, giving him the ability to whether the inevitable storms.

Are we there now? Very unlikely, despite the super bullish economy. 4 years of gains over 40% per annum and low inflation paint a picture, which says we don’t have blood in the streets.

The difficulty then is not for those investors that already have a well structured portfolio – bought at a fat margin of safety - they can sleep easy, through subsequent volatility.

Its starts to become a tad trickier now for those that have high cash holdings, but need to invest into real assets now as part of their diversified portfolio.

Do I go or do I stay? This is what many people heading for, nearing and into retirement with high cash holdings are asking. Clearly there is no one stop answer to the problem, but there are solutions. This comes in assessing the optimal exposure to the various asset classes, and the likely impact 3 years, 5 years, 10 years and 30 years down the road on a probability basis.

It would be a case of gung ho investing if the blood flowed. Now is the time for more calculated planning. We have a value proposition for you if you are in this position. Mail me on ian@seedinvestments.co.za and we will mail you a copy of this report.

No Real Direction in Market

LOCAL MARKETS

The JSE opened flat this morning, following an uneventful close on Asian markets. The market closed on a record high yesterday thanks to a surge of spending in the banking sector. There are no real drivers in the market which should look towards the opening on Wall Street.

The Reserve Bank released South Africa's broad M3 money supply measures figures this morning, showing an increase of 22.9%, slightly higher than January's figures. This has not affected the rand though, which traders expect to remain range bound today (R7.23-R7.30/$).

OVERSEAS MARKETS

Wall Street is set to open lower today on the back of rising oil prices. US shares ended higher yesterday thanks to an increase in optimism over the growth of the economy.

Most European markets have opened lower this morning amid concerns over the tension between Britain and Iran.

Asian markets ended slightly up today thanks to a surge of buying of domestic stocks in an otherwise uneventful day.

COMPANY NEWS

Prakash Desai has been appointed the group CEO of Johnnic Communications today.

Absa (ASA) has pledged to provide R2.6 billion to low-cost housing in South Africa by 2010.

Mittal Steel SA has launched the construction of two new kilns to increase liquid steel capacity at their Vanderbijlpark plant. This project will cost them about R600 million.

Does the noise factor make it difficult to plan?

The JSE’s main index, the JSE All Share index moved up to a new nominal high today at 27150.This type of information makes headline news. It’s topical and it sells newspapers, but you need to question its relevance to your specific circumstances. You need to ask, how relevant is this to my specific investment planning? How relevant is this to my specific requirements?

I once worked with a financial consultant, who mentioned to me one day “If you take the time to sit down and think about how much junk and superfluous information is spewed out in the newspaper in each day, you will realise that you can waste a lot of time concentrating on this”.

I think that is also true of the noise that is created around the equity market, and this is especially the case where it has provokes certain strong emotions.

As investors, we all need to prioritise what is important and de-emphasise what is noise. Yes this is easier said than done, but important.

Your requirements may simply be to create a large enough capital base, from which to draw down a growing income stream that is sustainable into retirement years. This is true for most investors and should therefore be priority number One. But how many of us concentrate on the noise and not on the long term target.

A market which has now run harder and faster for four years, produces what behavioural finance experts call “over-confidence”. For investors that have had full advantage it’s an overconfidence in their own ability.

At the same time the noise starts to produce fear of loss for those overexposed.

For those that have stood by the sidelines, there is emotion of regret.

The noise issue, as factual as it is, then more often than not, hinders investors in their strategic planning, producing euphoria, fear or gloom, or a combination of these emotions, depending on your position.

If the news headlines have a strong emotional pull, then it’s important to realise that the noise factor is actually not helping your long term position. Successful investors will try and reduce the emotional element as much as possible.

Firmer Market

LOCAL MARKETS

Stronger European markets have boosted the JSE today which opened higher this morning.

"Markets had a suprise up turn in late trade yesterday boosted mainly by lower than expected CPIX inflation and a weaker rand" says Marc Schroeder of NFB Financial Services Group. "Yesterday's positive inflation outlook and softer rand are helping our large cap exporters and the markets are certainly looking better today. World markets seem to be rallying which of course has a spin off on our emerging market."

The rand is steady in noon trade, ignoring the better-than-expected producer price inflation index report released this morning.

OVERSEAS MARKETS

Wall Street is set to open slightly higher this morning thanks to lower oil prices and preparation for the end of the first quarter. The market closed lower yesterday as investors were concerned about the rate of economic growth in the country.

European markets have opened higher this morning thanks to a spate of positive earnings news.

Most Asian markets closed higher today due to a weaker yen and strong Chinese markets.

COMPANY NEWS

Scharrig Mining, the South African mining services company, has acquired Richie Crane Hire for R40 million. This acquisition is in line with the company's strategy to "broaden their range of services and client base".

SABMiller plc has decided to invest around $170 million to build a second brewery in Russia. This will strengthen their presence in one of the fastest growing beer market in the world.

MTN expects adjusted headline earnings per share to be 584.7 cents for the last year. New subscribers and the acquisition of Investcom has been the biggest driver of these results.

Changing corporate structures

It’s interesting to watch the strategy of a company and how this plays out in the corporate structure. This is especially the case for conglomerates, which need to keep redefining their business. Many conglomerates were established in the apartheid years as they were restricted in only investing locally.

As global opportunities have opened up in the last 10 years, some quickly shed their non core assets and focused on their core business. SAB Miller comes to mind. Listing in London and focusing on expanding its global beer business, it sold out of non core assets.

That other great conglomerate, Barloworld, established by Major Ernest Barlow in 1902, incorporated in 1918 as Thomas Barlow & Sons (South Africa) Ltd and listed on the JSE in 1941.

I came across an interesting fact that said that in 1966 SAB and Barlows (then known as Thomas Barlow and Sons Ltd) exchanged 12m rand worth of stock and as a result SAB owned 22% of Barlows and Barlows a greater percentage in SAB.

Barlows expanded massively as a conglomerate in the 1970’s buying into inter alia Rand Mines, SA’s largest mining house at the time. Over the years but especially from the 1970’s onwards it bought into many companies, including Nampak, Tiger Oats (forerunner of Tigerbrands), CG Smith (sugar), etc.

In recent years it was contemplated that Barlows would made a bid for 100% of PPC. As I have mentioned before, for a company like Barlow’s, it makes a lot of sense to have complete control. The subsidiary company’s balance sheet can be restructured, debt can be introduced, and excess cash flows can flow up to the 100% parent with no further consideration for minorities.

Over the years Barlows increased its stake in PPC from 66% in 2002 to 71,6% in 2005 and 71,7% now.

PPC underperformed for many years, but over the last five, it has flourished as the country’s construction industry has boomed. The price of PPC rose far stronger than Barlows, and its market cap rose to a current R24,8 billion.

Barlows’ satisfaction with a majority and not full control of PPC stood out from its approach to its other investments and main divisions, where Barlows had 100% control. Its other main businesses included, Distribution, Barlow Motor (various dealerships and Avis), Coatings (Plascon) and Steel Tube.

As PPC outperformed Barlows, many investors into Barlows were keen to see it unbundled, but Barlows appeared reluctant to implement this idea. Remember a conglomerate mindset to build up as much size as possible.

However at the end of December, Barlows announced that following a strategic review, and subject to approvals it had decided to unbundled its PPC stake. Yesterday it again announced progress on this and also an update on the sale of its underperforming assets.

PPC generated excellent cash flows for Barlows, and so its impending unbundling will be missed. A focused company should achieve better returns on equity and ultimately improved returns for its shareholders.

Seed Investments provides investment consulting to private clients. We look at portfolio construction for investors particular circumstances. Our approach is to look at underlying funds for clients, but we believe that its very important to have a good grasp of the underlying portfolios, and the some insight into the company’s that make up these portfolios.

If you would like to get a greater insight into this process, including a brief PowerPoint on our process, please e-mail me with your details.

JSE Lower On World Markets

The JSE opened lower this morning, taking its cue from major world markets. The market ended slightly firmer yesterday, erasing earlier highs after a negative opening on Wall Street.

The rand is weaker against the dollar today following yesterday's slump. The dollar fell after rumours of an Iranian attack on a US vessel, prompting traders to look elsewhere.

OVERSEAS MARKETS

Analysts believe Wall Street will fall at the opening today due to rising oil prices and international tension. Shares fell yesterday after it was reported that the consumer confidence index dropped in February.

JSE Lifted By World Markets

LOCAL MARKETS

It's a quiet day on the JSE today after opening higher early this morning. The JSE ended lower yesterday after a slump on Wall Street. However, the Dow reversed a lot of its losses last night, resulting in the JSE's positive opening today.

The rand is also quiet and is expected to remain range bound (R7.13-R7.25/$) for the rest of the day.

OVERSEAS MARKETS

Wall Street is expected to open slightly lower this morning amid economic concerns. The market closed mixed yesterday as a housing report showed that new home sales dropped to seven year lows, adding to worries in the housing sector. Investors await the Conference Board's report on consumer confidence.

European markets are up this morning thanks to miners, banks and oil stocks.

Asian markets ended lower today on the back of poor data released on Wall Street. Investors are waiting for key economic data to be released in Japan and the US later this week.

COMPANY NEWS

LionOre, the global nickel miner and African Rainbow Mineral's (ARM) joint venture partner on the Nkomati mine, has been offered a $4 billion in cash by Xstrata, one of the world's largest mining companies.

The CEO of South African Airways, Khaya Ngqula, announced today that SAA is considering breaking up the company and privatising some of their units. This restructuring will be finalised in April.

Western Areas will be delisted on the JSE on Friday 30 March and acquired in full by Gold Fields.

Asking Questions

It’s always good to get various perspectives when looking to invest your capital. One obvious source is the many books on investing. Looking past the cynical view that their main aim is to sell as many copies as possible, with a secondly objective of dispensing with good advice, investors must try and distil

Ken Fisher followed his father, Philip Fisher into investing, and has been very successful in building up Fisher Investments as a US based money manager.

He has recently released a book on investing, titled The Only Three Questions that Count. I have not yet read the book – it’s on my list.

His 3 questions are

• What do you believe that is actually false?
• What can you fathom that others find unfathomable?
• What the heck is my brain doing to blindside me now?

Essentially he questions normal beliefs that become so prevalent, they are assumed to be facts. He challenges common beliefs and tries to get investors to look beyond the obvious.

One of his main investment beliefs is that stock prices are moved by the supply and demand.

Some of his controversial views include:
• You don't need to pick the best stocks to make money in the market.
• High price to earnings aren't more risky and tell you nothing. Neither do low P/Es.
• Oil can go as high as it wants – it won't impact stocks. In fact, we should pray for higher oil prices.
• While you're at it – pray for higher budget, current account, and trade deficits. They are all good for our economy and markets.
• Debt is not bad. Debt is very good – and America could use more of it!
• What really is causing the U.S. dollar to be weak – and why it doesn't matter

Questioning is something that investors should do before they invest, and again after they invest. The better the questions asked, the better the investment decisions you are likely to make. Investing is about increasing the probabilities.

Positive Sentiment On Asian Markets

LOCAL MARKETS

The JSE has reached the 27 000 mark this morning despite the absence of no real drivers in the market. Dealers believe that the market is "testing record levels" and would eventually yield to record taking later on.

The rand is still consolidating after last week's performance and is steady against major currencies this morning. The local unit is awaiting inflation data due out on Wednesday and Thursday.

OVERSEAS MARKETS

Wall Street is set to open slightly lower today following the previous weeks gains.

European markets have slipped slightly at the open today. This also comes after last week's rally. The FTSE is higher on the back of merger activity in the housebuilders sector.

There is a positive sentiment on Asian markets this week which have ended higher on the back of a weaker yen.

COMPANY NEWS

The diversified industrial group, Kairos Industrial (KIR), has announced that they expect their headline earnings per share for the year ended February to be between 40-50% higher than the previous period, boosting their shares by over 13% today.

Geely, a Chinese car manufacturer, is set to enter the South African market with their low cost vehicles.

Danisa Baloyi has alleged that Absa was aware of the R8 million loan she received from Fidentia. This comes after she was removed from the boards of the Absa Group and Absa Bank last week.

South Africa's Economics

The South African Reserve Bank ( SARB ), headed by Tito Mboweni, released their March 2007 Quarterly Bulletin yesterday. It is an extremely chunky document (coming in just shy of 80 pages) but comprehensively covers every aspect of South Africa’s economic position.

The economy came in with annualised GDP growth of 5.5% for the final quarter of 2006, which resulted in GDP growth for the whole year of 5% (broadly in line with the two previous years). The primary sector has been a drag on overall GDP once again, with the agricultural sector declining by 13% over the year, and mining contracting by 0.75% in 2006. Growth was positively impacted by a 13.25% growth in the construction sector, after growing by 12% in 2005. The effects of this kind of growth can be seen in the shortage of both human capital and raw material, resulting in massive building inflation.

Despite four hikes in the repo rate in 2006, household expenditure for the year increased by 7.25%. Fixed capital expenditure was up by 12.75% for the year as the country tries to address the problems of lack of capex in years gone by.

Inflation, whilst increasing in 2006, has remained in the SARB’s mandated 3-6% band since the middle of 2003. Some of the inputs into the CPIX basket have been running above this level (Transport running costs, alcohol and tobacco, and food and soft drinks) while the effects of a relatively strong currency, and increased international competition (particularly from China) has resulted in some products (furniture and equipment, vehicles, and clothing and footwear) being cheaper, in nominal terms, at the end of 2006 than at the beginning of the year. We can expect food price inflation to continue to put upward pressure on CPIX with drought forcing the price of maize to new highs.

The current account remains in a massive deficit, with the rand being stabilized by foreign inflows. These remain precarious as there was an outflow of direct investment, with notoriously flimsy portfolio flows driving the financial account. In and amongst these movements the SARB has been accumulating foreign reserves, which now stand at US$ 23.7 billion at the end of February 2007.

One can see why JSE, the company, has done well since listing. Turnover on the JSE amounted to R 2.1 trillion in 2006, up 66% on 2005’s turnover! More recently, trade averaged R 10.7 billion a day in February 2007. The market cap of the JSE at the end of February 2007 stood at R 5.3 trillion. This means that the average time that an investor holds onto a share is around 2 years.

While property prices continue to increase, the effects of a declining interest rate have muted these price increases. Medium sized residential property prices increased by 15.4% in the year to February 2007, after hitting a high of 35.6% in September 2004.

While this kind of information is tough to digest in one sitting, it is essential to have a firm knowledge of what the economic heartbeat of our country is, in order to able to successfully manage one’s own finances.

Seed makes it our business to find out what’s happening in the world, what is relevant to investing, and what effect it will have on our investors.

If you would like a detailed copy of our Value Proposition, with details of how we operate as an Investment Consultant to high net worth individuals, please don’t hesitate to contact Ian de Lange at ian@seedinvestments.co.za.

I trust you will have a good weekend, with the Proteas hopefully getting one over the Aussies tomorrow!

Mixed Start to JSE

It's a bland day on the JSE today as nothing seems to be giving the market direction this morning.

The rand is steady against major currencies in quiet trade. Traders believe the local unit should consolidate today after firming over the past two days.

OVERSEAS MARKETS

Analysts predict that Wall Street will open flat or slightly lower today as the market awaits a home sales report due out later. US markets ended mixed yesterday, taking a "breather" from the previous day's consolidation.

European markets closed higher yesterday on the back of predicted US interest rate cuts.

The Nikkei has closed on a new three week high thanks to a weaker yen.

COMPANY NEWS

Eland Platinum has sold five million new shares worth R350 million to a Bahrain-based investment house. This will be used to fund various undisclosed future corporate activities.

Phumelela Gaming (PHM) has announced that they have lifted headline earnings by 135% for the six months ending January 2007.

Fidentia boss J Arthur Brown was released from prison yesterday after his R1 million bail was paid by a third party in the form of a property.

Remgro wants all of Rainbow

Remgro can’t really be blamed for not considering minorities in their dealings. Today they announced a purchase offer for the shares in Rainbow Chicken that they don’t own, some 38%. They could possibly have made this offer at prices far cheaper, when they backed the company with rights issues. Now they are doing it at a far greater price.

This proposal, priced at R16 per rainbow share, a big premium to previous close, I believe speaks to the way that Remgro does business. It has not looked to take advantage of minorities. When its sister technology company, Venfin sold off its stake in Vodacom, the minorities came alongside in the deal that was structured with UK based Vodafone.

Remgro bought into Rainbow in the late 1980’s. At the time it was an extremely well run operation, owned by the Methven family and ceo Stanley Methven. The story goes that he had many suitors for the business but was a reluctant seller. No sooner had Methven sold its majority stake to Remgro subsidiary HL&H in 1989, that the business start to turn down.

It was beset with problem after problem, from diseases to management issues. The year after it was bought Rainbow posted a profit of R86m. This soon fell due to all sorts of problems. In 1993 the business made a loss of R77m and ever larger losses in the next few years. Rainbow brought in ceo after ceo to try and turn the business around.

They were also forced to underwrite a massive rights issue. Slowly the business came right and this was reflected in the steady gains of the share price from less than R1 in 2000 to its takeout price now of R16. This places a value of R4,5 billion on the company.

Remgro announcement also mentioned the fact that the company can be structured more efficiently if wholly owned. There is no doubt about this, having access to the cash flows is one positive aspect of 100% ownership. There other may be BEE. Remgro said that Rainbow is currently evaluating a BEE transaction, but that this process will be halted until the offer has been implemented. Remgro will thus carry the BEE cost.

There is an offer of 9 Remgro shares for every 100 rainbow shares.

The market had not expected this, and the price surged 36% or 420c on the day.

Remgro shares fell 0,8% to 17290c on the day. It has a market cap of R77,5 billion.

There is a lot of merit in the way that Remgro conducts its business. It’s a testimony to the people behind the business. As an investor, you should always try and make an assessment of the people behind the business. What is their business philosophy? Is this carried out in practice. Are they there for the quick deal, win at all costs, or are they there for the long haul, taking into account the interests of the all other parties.

There same goes in all your business dealings. As far as possible try and assess the people.

JSE Surges Ahead

LOCAL MARKETS

Positive world markets have boosted the JSE this morning as high volumes indicate a strong start to the day. "The market is catching up nicely after yesterday's public holiday and should improve over the course of the day" a dealer said.

The rand is also performing well after a weakening in the dollar. Traders are awaiting the release of South Africa's current account position in the fourth quarter of 2006. If dealers are right about the demand from importers, it should trade in a new range of R7.25-R7.35/$.

OVERSEAS MARKETS

US markets are set to open lower today after the past 3 days strong performance. Wall Street had its best day yesterday after the Federal Reserve indicated that rate cuts could be on the cards later this year.

European markets have opened higher this morning, cheered on by the Fed's decision on US interest rates.

Investors in Asia were also encouraged by Wall Street's rally, ending up today. The Nikkei closed at its highest level in three weeks.

COMPANY NEWS

Telkom has announced that they have acquired 75% of the Nigerian Private Telecommunications Operator, Multi-links Telecommunications, for $280 million.

Protea Hotels have been taken over by Australia's Stella Group for R1.48 billion.

Remgro has put in a firm offer to buy out the 38% minority shareholding in Rainbow for R16 cash for each Rainbow share or nine Remgro shares for every 100 shares in Rainbow. This offer values Rainbow at R4.5 billion.

Do Investors need Advice

Investors must ask themselves the question. “Is there value in advice?” Where investing has been relatively easy, an investor can almost dismiss putting a more structured investment plan in place. But can he? Markets go through cycles, and astute investors don’t typically repeat the same mistakes that novice investors do. At least most of the time!

A Lehman Brothers report came out with a report entitled – The Value of advice – Breaking the cycle of emotional investing.

The first argument one may make is that as financial advisors they will have a biased view on this. Yes there is an element of truth in this. But it’s been my experience that it’s the wealthy and astute investors that appoint advisors. It comes at a cost, but then so does not appointing advisors. These astute investors are the ones that know how to make money, know how to start and run businesses and know the importance of quality and ongoing advice.

The report starts off by saying that when portfolios are growing and doing well, investors feel optimistic and smart. Often more and more risk is taken on and in the shorter to medium term this pays, and so perpetuates the process. This has been the case for the last 4 years. Increasingly so, investors have become comfortable and so taken on more risk.

However it will get to a point when portfolio performance slumps, pulling back and this has an immediate emotional knock. When this process runs through 6 months or more, investors then start to feel increasingly anxious and uncertain and look to reduce risk, often making drastic decisions. .

As I mentioned in a recent report, market prices are far more volatile than they should be. This is because human emotions come into play in the process of investing and it’s this sentiment that moves prices up and down around true value and in some cases far from true value.

It’s the same emotional bias to recent experience that makes a share moving up sharply appear attractive, while one falling appear unattractive.

An advisor should have the ability to take a step back, look at things objectively, and provide a considered recommendation. An advisor should also have a thorough process in the back to deliver the advice given, so as to reduce emotion as far as possible. You don’t want to appoint an investor that is going to fall into the same emotional traps.

Investing is a marathon. The sprints are exciting, but meeting the longer term objectives is the race that counts. We are heading for the end of March. 4 years ago, when the index was around 7500, investors would not have dreamt of these levels. Now it’s all too easy.

My recommendation is that everyone at least look at the options available. For those investors who want to have a clear objective driven plan, then make sure that your advisor can do this. Also that the advisor has a proper process.

Invitation :

I am very excited about the service offering that we at Seed Investments have for clients. We are in the process of rebranding the old Exsequor Investments. We are 100% independent with a clear process for delivering longer term value to clients. There is no cost for an initial investment plan and no obligation, so it’s worth going through the process of decising if there is value or not.

Mr Market

What a difference 2 weeks can make in global stockmarkets. Just two weeks ago, global markets came under pressure, with the JSE falling almost 900 points at the end of February. The index a couple of days later was down nearly 8%, now it’s slowly steadied off, as have most global markets. The question then is this “do equity markets correctly value companies on a daily basis or not?”

On a daily basis, there is a lot of noise. Market prices are too volatile around valuations that over any length of time should not be that volatile. Over the longer term, valuations should and do track the underlying profitability of companies, but over the shorter term, investor sentiment plays a very large part in daily movement.

Looking at percentage weekly moves over any period of time on any exchange, it’s evident that prices are very volatile, with moves up and down as much as 6% in one week. A percentage such as this on large company such as an Anglos is around R33 billion! A massive price change in one week. Extrapolate this to an entire exchange of companies and then across the globe and the movement in gross valuations is exceptionally high.

This is where value investors come to the fore. By taking advantage of what Benjamin Graham described as the neurotic Mr Market, a value investor can produce superior results.

Graham told the parable of Mr Market being a partner in a share that you own. He is neurotic in that his mood swings form optimism to pessimism. One day he will be extremely optimistic and nominate high prices for the same business, while on other days he gets extremely pessimistic and nominates very low prices.

A more rational investor needs to stand back from the emotional Mr Market. Indeed try and take advantage by buying from him when he is pessimistic, and conversely sell to him when he is too optimistic.

So what is his mood at the moment? Yes he had a bad couple of days a few weeks back, but getting over this fast. He is fairly upbeat and indeed even looking at listing a few new businesses, for which he is prepared to pay reasonably good prices.

Some investors are taking advantage of his good prices and selling to him. Tuesday will see the listing of another company in the construction and building industry.

Friday Market Wrap

As the nominal value for the JSE All Share index increases, so point movements represent less and less in absolute terms. A few years ago a decline in the index of say 600 points would have represented an 8% decline. Now on Tuesday when the JSE All Share index lost 600 points on Wednesday it’s a more bearable 2,3% decline in one day..

It just goes to show that the index is really just that - a mathematical summation of the average movement of underlying shares. Looking at the point increase or decrease on any one day is rather meaningless, and it always intrigues me that news services carry this as their main financial news. “And now to the financial news, today the JSE All Share index gained 350 points, the Resources index gained 400 points while the Financial index lost 20 points”

Investors will need to dig far deeper than this. While the overall market may have has a trend, there will always be companies that are doing well, and more specifically share prices of these companies that remain good value and are not subjected to the daily whims.

Two shares this week that traded at new highs were insurance companies, Metropolitan Life and Clientele Life. The former is a R9,5 billion company and Clientele is relatively small at R2,5billion, the smallest of the listed life companies. Metlife traded up at a new 12 month high of 1602c, while Clientele moved to fresh high of R78.

Clientele is a company that has moved up since 2004 and for various reasons not been subjected at all to the whims of the market. The main reason is that the shares are tightly held by main shareholder Hollard Holdings, leaving a relatively small float for other shareholders.

It’s a company that trades below the radar screen but has been reporting excellent growth, hence the steady rise in the share price. Only a handful of unit trusts have held this share though.

This is where it gets important. An investor will either invest directly or rely on advice and planning from a dedicated investment consultant. If the latter and we recommend this for all investors, even if only for a core of your asset base, then you will want to know that you advisor has excellent knowledge and insight into underlying shares, and how these are represented in various portfolios.

You can mail me on ian@seedinvestments.co.za for details into our dedicated team, and some of our thoughts on what it takes to manage client’s funds. Seed Investments is focused on providing investment consulting to high net worth clients.

Slow Start

LOCAL MARKETS

The JSE has opened on low volumes after yesterdays action preceding the futures closeout. There is no specific direction in the market after overseas markets boosted the JSE yesterday.

The rand awaits US data to be released later this afternoon. In the meantime, the local unit is stable against major currencies. Traders believe it should remain in the lower half of the R7.38-R7.48/$ range.

OVERSEAS MARKETS

The government's report on consumer prices in February is due to be released in the US before the open today. There are fears that the market will open lower because of these figures and the general lack of optimism in the US economy.

The Nikkei ended down by 0.7% today amid concerns over the US economy, a drop in the banking sector and a stronger yen.

European markets have opened lower this morning after the fall in Asian markets.

COMPANY NEWS

Emperor Mines, DRDGold's Australian unit, has announced that they are in the process of finalising an agreement outlining the sale of their Fijian assets. DRDGold has a 78.7% stake in Emperor Mines.

Brait's buyout of glass maker Consol has been approved by the Competition Tribunal. Brait is offering R19.50 per share, valuing the company at R6.2 billion.

Edcon is planning on asking shareholders in a meeting on the 16th of April to approve Bain Capital LLC's R25 billion buyout offer. Bain has made an offer of R46 per ordinary share and R2 for every preference share.

PSG sells out of JSE

PSG is a company that has performed very well over the last 10 years since listing. It came onto the market firstly in the form of listed PAG, a recruitment company. The founder Mouton used this as a vehicle into which to reverse list his then small PSG group. It’s performed admirably over the years.

The modus operandi has varied, but by and large it’s been to start up financial services companies, get them to critical mass, and then usually list them on the JSE. This has worked well when the market values were such that it made sense to sell. At times when listed values were depressed, PSG has taken the opportunity to buy back shares.

At times the company has also so been opportunistic in some cases, where deals and values presented themselves. It took advantage of failures in the so called A2 banks.

PSG has over the last few years also taken advantage of some of the values in unlisted companies and being buying into agri businesses. It acquired stakes in Pioneer, Food, and KWV and transferred these stakes to a company called Zeder. This company then raised R700m, and listed on the JSE. PSG’s stake was reduced down to 35,1%. Zeder now has a market cap of R1,5 billion.

It also started building up a stake in the JSE before the old rights were converted to shares and before the JSE itself listed on its own boards. It built the stake up to 15% of the outstanding equity. At 15% this was the single largest shareholder. It could not increase its stake beyond this due to regulations, and this is one of the main reasons for the sale.

The shares were acquired at prices as low as R3 per share. The average selling price was in the order of Today it announced the sale of all of these shares, realising just shy of R700m. This represented a MAJOR profit enhancement for PSG and hence PSG shareholders. The market value at end of August 2006 was R455m and so the gains have been excellent.

The JSE listed on its own exchange at around R22, and moved up steadily to around R60. Its expensive, but being a “monopoly” has very high barriers to entry. It’s also a business with high operational gearing – I spoke about this some time back. In the bull market it has reported excellent earnings.

Despite PSG’s 15%, they could not get board representation and could not obtain approval to increase its stake above 15%. It was therefore a passive holding, and PSG likes to add value, and do some financial engineering. This was not possible with the JSE stake. Still it made huge profits.

With PSG selling, this may be a sign for shareholders to follow suit. I am not sure. They have an excellent track record and so it’s definitely important to watch closely and consider options. PSG slipped 3,2% while the JSE gained 3% on the day.

Markets remain nervous

Barrons, a US financial publication had an article today which again spoke about the hot topic - the subprime mortgage market. It started, “THE BUSINESS OF AMERICA IS BUSINESS, Calvin Coolidge famously declared in 1925. Some six decades later, Silent Cal would have to admit he's wrong: the business of America is finance.”

What does this mean? While ordinarily there is often somewhat of a disconnect between the underlying economy and the financial markets, now especially in the US, the financial markets themselves, including the massive mortgage lending market and all its various guises, are having a direct and more immediate impact on the underlying economy, which is largely financial.

To illustrate further, where the economy largely comprises primary production and manufacturing, selling into a local and offshore market, then vagaries of the share prices of such companies listed on exchanges, will not have an immediate impact on the underlying businesses. A manufacturer produces bottles; it has suppliers and customers both with medium term contracts. It share price, having risen steadily, drops 15% in one day. Does the business itself suffer? No. Sure a sharp drop in prices for whatever reason may be a harbinger of underlying economic problems to come in 12 months or 18 months, but it won’t in and by itself affect business operations.

Not so for an economy largely comprising financial gearing, and consumption borne out of credit expansion. Enter the massive creation through mortgage originators, aggressive sub prime lenders and the ability of banks to package and pass on debt through securitisation. Their businesses have been immediately impacted by sharp collapses in their share prices, which in turn affect prices, to the point where many have collapsed.

I mentioned yesterday that credit creation pushed up asset prices, and peculiarly this improved the collateral of lenders. Why? Because as the prices of the underlying assets increased, so the loan to value of houses reduced. It’s now starting to unwind.

Yes it does look bad, and yes this could be the “canary in a coal mine”, but one can’t underestimate the resilience of the US economy, its consumers and ability to get out of potentially crippling scenarios. The US Federal Reserve has saved the day from potentially nasty events such as Y2K, Long Term Capital, Tech bubble, Middle East wars, terrorist attacks etc. It could do it again.

Global markets ended down, while the US remains resilient. It opened up, soon went down, and now back into positive territory.

Stay positive, have a longer term strategic plan of action, a diversified investment portfolio and you will rest easy.

Wall Street Shakes Up Major Markets

LOCAL MARKETS

The top 40 index has fallen by at least 3% today on the back of a tumble in world markets and commodity prices. The market is volatile today with the biggest losses occuring in the financial and banking sectors.

The rand is weaker in early trade and looks to be under pressure today as investors look to back out of risky markets. Traders expect the rand to reach lows of R7.54/$.

OVERSEAS MARKETS

It was another bad day on Wall Street as shares plunged lower amid concerns over mortgage defaults in the housing sector. Analysts believe the market should open firmer today.

Asian markets have closed lower today tracking Wall Street's performance yesterday. Japanese stocks have fallen by almost 3%, affected in part by a stronger yen.

European markets fell for the second day in a row yesterday over worries about the US economy.

COMPANY NEWS

Metropolitan Holdings Ltd has reported an increase in its annual headline earnings per share by 28%. Their outlook for their target markets also remain positive.

Murray & Roberts and WBHO construction firms have won a R2.85 billion contract to build the 2010 Soccer World Cup Stadium in Cape Town.

The Facets ladies lifestyle centre, owned by Fidentia boss J Arthur Brown's wife, has been placed in provisional liquidation by the Cape High Court.

What is this sub prime mortgage market?

Markets across the globe turned negative again today. One of the hot topics is the so called sub prime lending market in the US. In South Africa the closest thing we see to flagrant credit extension, is the handing out of credit cards likes sweets at a child’s birthday party. In the US, lenders of low quality debt have been until recently literally been exploding, assisting in fuelling asset prices.

So what is a sub prime lender? These are lenders who are prepared to provide finance for residential mortgages, to borrowers with higher credit risk. They will do this at a risk premium, hence the term sub prime. Exotic versions of these loans have developed over time, including the very toxic interest only and negative amortisation loans.

In these loan structures, heavily indebted clients get deeper into debt as they are not obliged to pay down all the interest requirements. This is a brief story noted by John Mauldin this past week.

"A 'customer' bought his house in '05 for $650,000. The house was new and he blatantly over-paid. He put no money down and the builder paid his closing costs. Just so we're clear, he didn't bring one red cent to the deal at any point. He got a no-doc loan. Just so we're clear about what no-doc is, he didn't even fill out the income or asset sections of the 1003. This man didn't lie about how much he made or had. He simply made no representations on the subject. He had 'perfect' credit. Just so we're clear, 'perfect' credit in this case consisted of +24 months of clean payments on two credit cards with high limits of $3K and $4K.

"There is no consideration about how much credit he could or had been able to handle. He received 80/20 financing. The 80% first is a negative amortization loan. Today he wants to get a fixed-rate loan to pay down principal. The problems: He made the minimum payments on his negative amortization first. He now owes +$37K more than he originally did. On top of the fact that he overpaid, the house hasn't appreciated. He probably owes in the neighborhood of $100K more than the house is worth (and that's before estimating any negative impact on price if he goes to foreclosure), and 37 houses are for sale in his immediate neighborhood. The big punch line? He is a 26-year-old, single busboy for a catering firm. He makes $33K per year."

Clearly this is an extreme type example and not the norm, but over the last few years, there is a large slice of this type of debt. Bond managers, Pimco, estimate sub prime as a percentage of total mortgages to be in the region of 20%.

Paul McCulley of Pimco has likened the sub prime lending market as a speculative Ponzi scheme. Borrowers will continue borrowing at even higher rates of interest as long as credit availability was so widespread and as long as the asset class itself (property prices) appreciated.

He says “The availability of credit trumped the price of credit. “ The converse is now going to be true. As the lenders go under and/ or tighten their lending criteria, so that availability of easy credit has and will continue to reduce. This in turn will start to impact the asset prices themselves.

The problem is widespread. For investors in global assets, the question becomes to what extent other assets will be impacted by reduced liquidity and the inevitable knock on effect. As McCulley concludes - The house is American’s most important asset and a possible meltdown is no minor matter.

The FTSE has opened lower this morning after disappointing news from SABMiller. Most European markets retreated yesterday due to the weak start on Wall Street and lacklustre corporate earnings news.

Japanese shares have ended lower today due to a bout of profit-taking and a stronger yen.

COMPANY NEWS

The World Bank's private-sector lender, the International Financial Corp, will invest $150 million in order to help platinum producer, Lonmin plc, expand small businesses around their South African mines.

Dutch brewer Heineken's decision to terminate SAB's licence to produce Amstel Lager will have a negative financial impact of up to $80 million on SABMiller's operating profit.

Peermont (South African casino and hotel operator) shareholders have approved a buyout offer from a management and black investor consortium to the value of R4.26 billion.

Still too many problems

Financial journals are again awash with reports of irregularities in the financial services sector. It’s excellent that the press have the ability to uncover and expose some of the ongoing problems, but what is concerning is that there are still so many such problems some 3 years now after the FAIS Act was promulgated.

The FAIS Act is the Financial Advisory and Intermediary Services Act with its main objective of protecting clients who use financial services and products. It’s a broad based legislation and so includes all financial services providers in the country. It was promulgated in 2002 and in full operation from October 2004. Perhaps some of the problems being uncovered are because of and not in spite of the legislation. I am not sure, but what I am sure of is that it’s unwise to believe that such legislation is a panacea for all ills.

Investors cannot put all their reliance on one piece of legislation. Yes it should go a long way to protect, but it’s never going to be foolproof.

In the Personal Finance:

“Errant administrators may lose licence to plunder savings”

“Service providers accused of pension fund surplus rip-off”

“Money Skills investors hope to get something back.”

It is the extreme headlines that sell newspapers, and to be fair, the Fidentia type problems are not the norm, but the problems of secret undisclosed profits and conflicts of interests etc are still far too widespread.

Our advice for investors is that selecting the correct investment advisor is just as, if not more important that the correct underlying investments or portfolio.

Some of the questions that an investors needs to ask include:

- who are the people behind the business?
- what is their track record?
- who are the counterparties that you work with?
- who will be the actual custodian of my investment funds?
- Is this an independent relationship?
- What is your investment process and what due diligence have you performed on underlying managers?

There are still far too many horror stories about clients losing large sums of money. With the current legal environment, the probability of something happening is small, but when it does happen it often has large adverse consequences. When it comes to investing the doctrine Caveat emptor (let the buyer beware) always applies.

For a copy of our value proposition, with details of how we operate as an investment consultant, please mail me on ian@seedinvestments.co.za

Stable Market

LOCAL MARKETS

A postive close in Asian markets and a general stability in world markets has resulted in the JSE's steady opening this morning. The market is directionless but positive ahead of the futures closeout at the end of the week.

The rand is holding onto its gains over the weekend and remains steady against major currencies today. The euro is also firmer against the dollar after profit taking on Friday in the US.

OVERSEAS MARKETS

Various data released on Friday led to a mixed close for Wall Street on Friday.

European markets have opened higher this morning thanks to a flurry of acquisition activity. This comes after a positive close on Friday.

Most Asian markets closed higher today. Continued yen weakness and renewed optimism in the economy has boosted Tokyo stocks.

COMPANY NEWS

Iliad Africa, the listed supplier of general and specialised building materials, has reported a 25% increase in fully diluted headline earnings per share for the year ending December 2006. This is the ninth successive year that they've posted an earnings growth.

MTN has announced that they have acquired a majority stake in Yemeni mobile phone firm Spacetel.

AVI Ltd, the South African branded consumer products group, has reported an increase in first-half headline earnings per share by 36%. This is in line with their forecast in December.

A Rare Breed

Warren Buffett is a rare breed. He is a shameless capitalist who avoids the opulence that many a lesser person would flaunt when they had "made it". Sure he does live a comfortable life, but when you consider that he is the world's second wealthiest person (and catching Bill Gates at number 1) he can be excused for his few comforts. His goal in life could probably be described as "pursuing wealth so that others can share it with him."

For those of you who have the time and are interested to have an insight as to how Buffett works, I strongly recommend giving his latest report to shareholders a read. It is fairly lengthy but, as Ian mentioned yesterday, is in a fairly readable format. The report can be found at www.berkshirehathaway.com. The website is fairly uninspiring, but this is the essence of the man. He isn't a web designer, and his website is therefore very sparse to say the least.

Berkshire's head office houses only 19 employees. Their sole function is to handle administration, tax returns and exchange requirements. For a company that paid across $4.4 billion (R 32 billion) in taxes last year, this is a skeleton staff. Mr Buffett prefers to allocate his resources to profit generating divisions, or those involved in acquiring profitable companies.

Ian has already mentioned how he goes about investing, but it is worth repeating. He simply goes around (or these days it's more like companies come to him) looking to find companies that are doing well, and that are currently generating good cash returns and that are likely to continue in that manner. Cash is king, and often investors are sucked into the hype of promises for the future. Buffett will choose having cash to invest over a potentially massive profit down the line any day of the week. He was heckled by many investment professionals for not participating in the TMT bubble at the end of the 1990's, while they were filling their boots he was sitting on the sidelines. He simply did not understand the industry, and everyone was buying on promises for the future. He was the one who laughed last.

On the local front, arguably South Africa's finest investor, Allan Gray, this week donated R 1.1 billion of his own money to his company's charitable trust. These are the kinds of capitalists that every country needs. The Allan Gray's and Warren Buffett's of the world are the ones who make other people wealthy through their own wealth creation, and then make massive contributions to charitable trusts in the twilights of their careers. Who said all capitalists are greedy?

European markets have opened weaker this morning as investors look ahead to key US jobs data. This comes after a positive close yesterday thanks to strong corporate results and renewed investor optimism.

Most Asian markets are on the road to recovery after their recent bad run. A weaker yen and a rebound in capital spent by companies in January led Tokyo shares higher today.

COMPANY NEWS

WBHO, the civil engineering and building contractor, has reported a 30% increase in adjusted headline earnings per share for the six months ending December 2006.

Johnnic Communications has increased their stake in the online recruitment services company, Career Junction, by a further 25%. This will raise their shareholding to 85%, with management owning the other 15%.

Pointers from Warren Buffett

In continuing looking at Berkshire Hathaway report, its strikes a reader as to the easy reading feel of the report. This is unlike most company annual financial reports which make for extremely tough reading at the best of times. Buffett likes to say it as it is, and then give the information in as easy a format as possible.

He is not shy in lavishing praise on some of the CEO of underlying businesses, where these businesses have performed well. One of his larger insurance businesses, GEICO, is one such business that had a very good year. He waxes lyrical about CEO Tony Nicely, who has been with the company for 45 years, starting at age 18, saying “Last year I told you that if you had a new son or grandson to be sure to name him Tony. But Don Keough, a Berkshire director, recently had a better idea. After reviewing GEICO’s performance in 2006, he wrote me, “Forget births. Tell the shareholders to immediately change the names of their present children to Tony or Antoinette.” Don signed his letter “Tony.”

He has also set out in this report 2 yardsticks for the business, which give a clear indication of how it has changed over the 40 years. Firstly he measures the value of investments on a per share basis. This has grown from $4 per share to $80636 at the end of 2006. This is an annual growth rate of 27,5% per annum. However over the last 10 years this rate has slowed to 12,6%.

In the earlier years, the company was essentially an investment holding company, buying into passive listed investments. Over the years this evolved to investing the large asset base into operating businesses. Buffett points out that using funds for these acquisitions slowed down the growth in investments, but accelerated the gains in pre tax earnings.

It’s also interesting to read how Buffett considers Berkshire to be the “buyer of choice” for many business owners. Clearly he requires LARGE deals to make an impact and more and more it sounds like the deals come to him rather than Berkshire have to hunt them down. This is ideal as opposed to a normal private equity bidding process, where the eventual buyer ends up paying too much in a bidding war.

He notes: “We continue, however, to need “elephants” in order for us to use Berkshire’s flood of incoming cash. Charlie and I must therefore ignore the pursuit of mice and focus our acquisition efforts on much bigger game.”

Private owners come to Berkshire because their model is to leave companies intact and let them run as best they can. He avoids trying to structure synergies, break up companies and introduce financial gearing. His requirement is that excess cash flow flows up to the main company and Berkshire then ends up being an allocator of capital. It is judged on how efficiently they can allocate this capital and so growth shareholder wealth.

Buffett is a long term investor. He is a buyer and his ideal holding period is forever. He is not a trader. He invests in what he understands. He does not look for the latest fad to make a quick buck. This is just not his approach to making money. He looks at the people behind the business, and is essentially backing them. These are all excellent qualities that any investor should try and emulate. Far too often it’s the simple, steady approach that is required, but neglected.

It’s one of the reasons why we have quoted Warren Buffet in our investment beliefs as investment advisors. While we are possibly not going to achieve what Buffett has, we admire his approach and as far as possible we try and emulate this approach for our clients in planning the investment strategy.

The Berkshire Hathaway report

Warren Buffett’s Berkshire Hathaway annual report always makes for very interesting reading. Not only is he the second richest man in the world, but he has a remarkable ability to distil complex situations, financial markets, into simple layman’s terms. He has the ability to take a step back from the noise and consider the big picture.

Apologies to those that have already read this, but I am sending out again, because of mail server problems. I will give a few points from his recently released report. At 82 pages it goes into some detail, and so I will gives my thoughts over the next couple of days because I do find it fascinating.

The report always starts off by comparing the annual percentage change in the book value per Berkshire share to the annual return on the US markets as measured by the S&P 500.

The S&P 500 index including dividends received as been volatile over the period 1965 to 2006, recording a negative 26,4% in 1974 and a negative 22% in 2002, but also large gains such as 37% in 1975 and 37,6% in 1995. On a compounded basis an investor over these 42 years would have received 10,4% had he invested in the S&P 500.

By comparison the annual compounded return of Berkshire Hathaway’s shares has been 21,4%. The out performance has been 11% compounded per annum. In investing terms this is known as the alpha. i.e. the return in excess of the market return.

At a total group level, the recorded gain in net worth was a massive $16,9 billion, which he estimates to be the biggest booked by any American business. Berkshire is essentially an investment company by and large owning a range of subsidiaries. Over the years the focus has increasingly moved from passive equity holdings to owning operating businesses outright. At the end of 2006, Buffett counts 73, saying that the majority performed outstandingly well.

The big advantage of owing a business outright, is the access to that business’ cash flow, and Buffett has access to a wall of cash each year, for which he must find a home.

The largest component is the insurance businesses. He has owned insurance businesses for 40 years. His first purchase was national Indemnity for $8,6m. Now his insurance businesses produced an underwriting profit of $3,8 billion. These are erratic businesses because this is up from a profit of only $53m in 2005. The biggest turnaround was B-H reinsurance coming from an underwriting loss of $1 billion to an underwriting profit of $1,65 billion in 2006.

I believe that he has done well out of the insurance business, because he understands investing better than anyone else. He says this talking about large super cat(astrophe) insurance and future Katrina’s “We remain prepared to lose $6 billion in a single event, if we have been paid appropriately for assuming that risk.”

Investors must always think in these terms. If the value metrics indicate that the investor is likely to be paid for assuming the greater risk, then make the investment. However if they are such that the investor is unlikely to be rewarded for taking on the risk, then reduce exposure quickly.

I will discuss more of the fascinating report tomorrow.

For investors looking to appoint an independent investment consultant, please email me for an updated value proposition document. I am now joined by a partner in the business and he brings an added dimension, which we hope to translate into value add for clients. Mail me on ian@seedinvestments.co.za for more details.

The Berkshire Hathaway report

Warren Buffett’s Berkshire Hathaway annual report always makes for very interesting reading. Not only is he the second richest man in the world, but he has a remarkable ability to distil complex situations, financial markets, into simple layman’s terms. He has the ability to take a step back from the noise and consider the big picture.

I will give a few points from his recently released report today. At 82 pages it goes into some detail, and so I will gives my thoughts over the next couple of days because I do find it fascinating.

He always starts off by comparing the annual percentage change in the book value per Berkshire share to the annual return on the US markets as measured by the S&P 500.

The S&P 500 index including dividends received as been volatile over the period 1965 to 2006, recording a negative 26,4% in 1974 and a negative 22% in 2002, but also large gains such as 37% in 1975 and 37,6% in 1995. On a compounded basis an investor over these 42 years would have received 10,4% had he invested in the S&P 500.

By comparison the annual compounded return of Berkshire Hathaway’s shares has been 21,4%. The out performance has been 11% compounded per annum. In investing terms this is known as the alpha. i.e. the return in excess of the market return.

At a total group level, the recorded gain in net worth was a massive $16,9 billion, which he estimates to be the biggest booked by any American business. Berkshire is essentially an investment company by and large owning a range of subsidiaries. Over the years the focus has increasingly moved from passive equity holdings to owning operating businesses outright. At the end of 2006, Buffett counts 73, saying that the majority performed outstandingly well.

The big advantage of owing a business outright, is the access to that business’ cash flow, and Buffett has access to a wall of cash each year, for which he must find a home.

The largest component is the insurance businesses. He has owned insurance businesses for 40 years. His first purchase was national Indemnity for $8,6m. Now his insurance businesses produced an underwriting profit of $3,8 billion. These are erratic businesses because this is up from a profit of only $53m in 2005. The biggest turnaround was B-H reinsurance coming from an underwriting loss of $1 billion to an underwriting profit of $1,65 billion in 2006.

I believe that he has done well out of the insurance business, because he understands investing better than anyone else. He says this talking about large super cat(astrophe) insurance and future Katrina’s “We remain prepared to lose $6 billion in a single event, if we have been paid appropriately for assuming that risk.”

Investors must always think in these terms. If the value metrics indicate that the investor is likely to be paid for assuming the greater risk, then make the investment. However if they are such that the investor is unlikely to be rewarded for taking on the risk, then reduce exposure quickly.

I will discuss more of the fascinating report tomorrow. For those investors who would like a copy of our updated value proposition document, which includes our investment beliefs, please mail me on ian@seedinvestments.co.za

Asian Markets and Metals Prop JSE Up

LOCAL MARKETS

A slight recovery in Asian markets and higher metal prices has helped the JSE recover from its poor performance yesterday. Analysts aren't too optimistic about this recovery though and expect the market to remain in the negative this week.

The worst seems to be over for the rand which has recovered on the back of stronger world and emerging markets. Traders believe the local unit should trade as low as R7.32/$ later today.

OVERSEAS MARKETS

Wall Street is set to open higher today after a rebound in world markets. This comes after closing lower yesterday following losses in Asia and Europe.

Asian stocks have rallied after a week of solid losses, ending higher today. Strong buying across the various bourses occured amidst high volumes.

European markets are trading higher today and are looking ahead to a positive opening on Wall Street.

COMPANY NEWS

The Scorpions have arrested Fidentia boss J. Arthur Brown and Graham Maddock this morning. They are appearing on charges of theft of R200 million.

The mining group, Merafe Resources, has announced that they have more than doubled their headline earnings per share for the year ending December 2006. This comes on the back of a 68% spike in revenue to just over R1 billion.

Cathie Markus has announced that she will retire from Impala Platinum as director, taking effect from 31 March 2007.

Prices are wilder than Values

It is a truism that share prices fluctuate far more than the underlying value of a company fluctuates. While company performance has been excellent over the last few years, it’s not true that the underlying VALUE of these companies has gained to the same extent. At the same time, while share prices have come off sharply in the last few trading days, intrinsic VALUES have probably not declined. If anything companies are probably worth more now than they were a week ago.

This is a concept that investors who concentrate on value understand. By not focusing on daily prices, they concentrate on trying to get a good understanding of the underlying value. Then it’s a matter of comparing their assessment of the underlying value to the current traded price.

If the price trades at a deep discount, then it’s worth digging deeper, and trying to understand if the market as a whole is not pricing the investment correctly. Conversely the market as a whole sometimes gets euphoric and places too high a value on the business compared to the underlying intrinsic value.

Bidvest is a company that reported today. It’s a big company that generated R47,9 billion in revenues and headline earnings of R1,4 billion, an increase of 22,7% for the year.

This is a company that I always like to cite as one where the investors got far too euphoric some years ago. The company became more and more attractive in the late 1997 and into 1998. It was justified because the company reported higher and higher results, and indeed continuing to report higher subsequent earnings.

These went from 271c per share to 310c, 365c, 436c, and 465c in June 2003. So nothing wrong with the company at all, BUT the share price having peaked above R50 in 1998, basically moved flat to down for the next 6 years and more until mid 2004, when earnings strength again caught up.

An investor in 1998 would have been investing in a great company. An investor in 1998 would have been investing in a company that kept on delivering a steady increase in earnings per share. An investor in 1998 would have been investing in a company that continued to declare out a higher dividend.

The problem was that the investor overpaid for the investment. It was easy to overpay at the time. The share price had moved up for some time. It had performed well, making shareholders money. Excellent management was and remains in place. It was and remains an excellent cash generator.

Investors however took some pain, and many would have sold out as the price moved sideways to down for the next 6 years. So the wonderful company at the time did not make a wonderful investment. The reason? Investors overpaid. They paid prices into the mid 20’s as a multiple of earnings.

It reminds me of the construction industry at the moment. Wonderful industry, coming off a depressed base, booming on the back of public and private spending, 2010 world cup coming up, massive and full order books into the future. Margins are expanding.

Prices for the companies are rich however as much of the good news is factored in. Can prices for these companies move up? Yes if earnings continue to surprise on the upside. Is the risk increasing for investors? Yes, at some point that may just pay too much for all the good prospects. Always remember Bidvest.

We advise private clients on their investment planning. Exsequor Investments has been renamed as Seed Investment Consultants. We can mail a value proposition document for your interest.

JSE Down By More Than 2%

LOCAL MARKETS

The JSE has hit below the 25 000 mark again at the opening today on the back of weaker world markets and a drop in mining stocks. Asian markets fell by more than 3% which has affected the JSE and prompted a weakness in other shares.

The rand has reached a four-month low by plunging to over R7.50/$. Traders believe negativity in the currency will continue, reaching R7.68/$ later this week. A weakness in global markets has triggered this performance, resulting in investors pulling back form riskier assets.

OVERSEAS MARKETS

Wall Street continued it's poor run after a disastrous week closing lower on Friday. Fresh concerns over the economy encouraged wide-spread selling, culminating in the worst week for the market in over four years.

Asian markets have tumbled again as a result of a stronger yen and the continuation of a global sell-off. The Nikkei fell by 3.3%, it's biggest loss in 9 months.

European markets have opened lower thanks to the slump in Asian markets and investor expectation that Wall Street will open lower too.

COMPANY NEWS

Aveng, the construction and engineering firm, has more than doubled their diluted headline earnings per share in the six months ending December 2006. Second half growth is predicted to be less impressive.

Sasol (SOL) has reported that their diluted headline earnings per share is 7.3% higher than last year's half-year result.

Glenrand MIB has been appointed as the South African insurance brokers to the Bombela Concessionaire for the Gautrain Rapid Rail Link Project.

Achieving a Superior Risk / Reward Result

It has been an extremely volatile week in the markets, reminding those who had forgotten that equities are indeed risky assets. I am sure that many people got burnt this week in the markets, but some more than others.

Generally the biggest losers are those who don't have a clear plan. They are the ones who listen for tips, and are always trading on other people's advice. While those investors who ride out the storm are often the ones who have a clear investment plan and either are well educated on their investments or have a trusted source of solid investment advice.

Those investors who brave and can stomach periodic losses are the ones who, over time, tend to get the best returns, whilst those who are extremely risk adverse, and only invest in bank deposits, are unable to create significant real capital growth.

There is the middle ground, however, and this strategy, if executed skilfully, will give the investor a superior risk/reward result. They may not get the same absolute results as the fully invested investor, but should get close with much less volatility (worry). This strategy is akin to a cricket side who has the aim of batting aggressively, but who look to consolidate and protect their wicket when they have had an excellent start, or if they see that the track is 'bowler friendly'. The brave investor is the one who plays 'brave cricket' and looks to get maximum reward at all times. Sure there will be periods when you completely bomb out, but there is the potential to score 438 in one game!

This middle ground strategy is one where the investor (or their advisor) has a firm grasp of their needs, risk tolerance and financial goal. They can then create a plan that aims to achieve the goal with as little risk as possible. This plan should also seek to reduce as much emotion out of decision making process as possible, as emotion is only good at clouding judgement, and generally detracts from investment performance.

While periods like this will hurt most investors, those who have a solid plan and an eye firmly on their financial goals will be able to take advantage any opportunities arising.

We offer a trusted source of solid investment advice and can help you through these times of volatility, if you need assistance on constructing a robust investment plan or help in achieving your financial goals please feel free to get hold of Ian (ian@exsequor.co.za) for a confidential discussion.

JSE Weaker After Good Start

The JSE opened firmer today despite yesterday's sudden plunge before the close of trade. However, the market has turned negative after the turn-around in European markets today.

The rand reached it's worst level in months yesterday, trading at around R7.35/$. The local unit has firmed slightly today and is expected to trade in the R7.22-R7.37/$.

OVERSEAS MARKETS

It's been a volatile couple of days on Wall Street which ended modestly lower yesterday. A positive report on the US factory sector helped boost investor confidence after falling sharply in morning trade.

European markets have reversed their gains this morning and have tumbled lower today.

Most Asian markets have recovered cautiously but Tokyo has extended their losses following a recent strengthening of the yen.

COMPANY NEWS

South Africa's third biggest life insurer, the Liberty Group, has increased headline earnings per share by 34%. Their key embedded value per share rose 12% to R82.55.

Anglo American has sold 26% of their newly created Scaw South Africa (which produces steel and related products) to black empowerment companies.

Brait, the private equity company trying to buyout Shoprite, now may have to cut their bid to cover taxes which should anger investors.

Repositioning your portfolio more defensively

The JSE opened up firmer this morning, clearly buoyed by Wall Street finishing off its lows on Wednesday. However into the afternoon it lost ground as Europe markets remained under pressure and as US stock futures turned sharply lower. The JSE All Share index ended down 1,78%.

Share prices remain under pressure, and it’s interesting to watch the various commentators and their views. I spent some time watching CNBC last night, as they interviewed various high profile investors and market strategists.

There are some that will always remain bulls on the market and some that will always see the glass as half empty.

Is this a temporary blip, or the start of a bigger sell off? At this stage it’s not clear, but there is A probability that there could be a bigger decline. If not now, at some point. It’s the very nature of markets – they move from extreme pessimism to extreme optimism and then back again.

I believe that at this stage of the investment cycle, the smarter money is getting defensive. Their smart money view is simple. At times risk assets are priced attractively, and it pays to load up. At other times, the same risk assets are priced expensively, and it does not pay to assume too much risk.

Remember there is not always a direct correlation between risk and reward.

So investors ask “How do I get more defensive?” There are various ways to position an investment portfolio more defensively. A combination of these often makes sense for investors:

1. reduce exposure to risky assets. i.e. equities
2. within the equity portfolio increase allocation to defensive shares and away from high risk shares.
3. use hedge funds in the portfolio or managers that make use of derivatives.

Don’t sell your investments down and move into cash. This is often the worst defensive position.

If your portfolio is structured on an appropriate balanced basis, then you can rest easy. If not, then look to appoint an advisor that can structure such a portfolio, working with your overall investment base, and defined objectives. If you have any questions on how to do this, please feel free to contact me and we can discuss. If we can help that will be great, if not, we will try and point you in the right direction.

JSE Recovers After Two Day Losses

LOCAL MARKETS

The JSE has opened firmer today, adding just over 0.21% on the all share index in early trade. A firmer close on Wall Street added support to the local bourse.

The rand is steady against major currencies this morning. It is awaiting a whole bunch of US data to be released this afternoon which should give the local unit some direction. Traders believe it should remain in the R7.20-R7.27/$ range today.

OVERSEAS MARKETS

Wall Street bounced back yesterday after hitting an all time low since 2001 on Tuesday. Analysts say that this correction in the market was expected after their strong bullish run in recent weeks.

A rebound in financial stocks helped European markets recover after their losses over the past two days. A renewal in optimism and good earnings news led the FTSE higher this morning.

Asian markets continued to suffer losses today, despite a recovery on Wall Street.

COMPANY NEWS

Murray and Roberts have reported that they have more than doubled their first-half headline earnings per share in the quarter ending December 2006. They also expect to increase this by about 70% this year.

Standard Bank has announced that they have bought a majority stake in a Turkish securities and brokerage house. This is in addition to the other acquisitions they already have in Turkey.

Alexander Forbes has extended their shareholder meeting to approve the R8.8 billion private equity buyout to April 30.